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Fed Watch: Policymakers Wake Up To Inflation Threat, But Is It Too Late?

By Investing.com (Darrell Delamaide/Investing.com)Market OverviewJan 17, 2022 04:25AM ET
www.investing.com/analysis/fed-watch-policymakers-wake-up-to-inflation-threat-but-is-it-too-late-200614923
Fed Watch: Policymakers Wake Up To Inflation Threat, But Is It Too Late?
By Investing.com (Darrell Delamaide/Investing.com)   |  Jan 17, 2022 04:25AM ET
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Federal Reserve policymakers seem to have discovered religion, at least when it comes to inflation, after dragging their feet for months claiming it was transitory. But it may be too late.

Fed Chairman Jerome Powell called inflation a “severe threat” to economic recovery as he was peppered with questions during his confirmation hearing for a second term Tuesday. After long claiming the Fed had to maintain monetary accommodation to support the recovery, he now says the economy no longer needs emergency support.

Fed Governor Lael Brainard, who appeared before the Senate Banking Committee on Thursday for her confirmation as vice chair, said

“We do have a powerful tool” to curb inflation—namely, higher interest rates. After opposing any move to tighten monetary policy for years, Brainard told the committee that fighting inflation is the Fed’s “most important task.”

Powell May Have Missed The Boat

Powell, too, has maintained that the Fed knows how to contain inflation and will use its tools to do so when necessary.

But skepticism is growing that raising interest rates to quell demand will be ineffective at this point in fixing inflation caused by insufficient supply of labor and other resources. The damage is already done on the demand front through inflating the money supply and flooding consumers with aid in pandemic programs.

Powell is still not on board with reducing the high level of monetary accommodation, telling senators that he thinks the Fed can keep its inflated balance sheet intact and not start running off its bond holdings until “later” in the year. Even if the Fed stops adding to its holdings with new bond purchases, it will continue to reinvest maturing bonds in the nearly $9 trillion portfolio.

Richard Shelby, a Republican senator from Alabama who chaired the banking committee for years, said the Fed had “missed the boat” and needed to step in with measures against inflation much sooner. He added that the Fed, in his view, “has lost a lot of credibility” from Powell’s delay.

A veritable chorus of speeches and interviews echoed Powell and Brainard as other members of the Federal Open Market Committee chimed in on their readiness to tighten monetary policy this year to provide a so-called “soft landing” for the economy—taming inflation without a recession.

The hawkish St. Louis Fed chief James Bullard, for instance, said in an interview that he thinks the FOMC will have to move aggressively to fight inflation, raising rates four times this year, starting in March.

Another hawk, Kansas City Fed President Esther George, says the central bank should move much more quickly to run off its bond holdings, and begin even as it is raising interest rates.

But economists around the world are saying that everything from Chinese lockdowns to green energy policies will exacerbate the supply-chain crisis, while labor shortages will fuel inflation for many months.

The former head of the New York Fed, William Dudley, said last week that the Fed under Powell has made four crucial mistakes—shifting policy to allow overshooting of the 2% inflation target until the economy was already overheating, misjudging the strength of the labor market, considering inflation to be transitory, and holding off from reducing bond purchases for fear of another taper tantrum.

“I think the problem right now is that the markets aren’t taking them seriously enough,” Dudley said in an op-ed for Bloomberg.

Fed Board Nominees Chime In

President Joe Biden’s slate of nominees for the Fed board of governors isn’t likely to encourage market participants to think that the central bank is laser-focused on inflation.

Sarah Bloom Raskin, the nominee for vice chair for regulation, has made no secret of the fact that she thinks the Fed should be pressuring banks to allocate capital in line with reducing carbon emissions.

Pennsylvania Republican Senator Pat Toomey has been outspoken in opposing central bank intervention on climate, saying that is not part of the Fed’s mandate, and last week said he has “serious concerns” about Raskin’s nomination for that reason.

The two other nominees to the board, academics Lisa Cook and Philip Jefferson, while bringing an overdue minority perspective on Fed deliberations, have been involved in the Minneapolis Fed’s diversity institute. Toomey again has opposed the regional bank’s emphasis on diversity as being beyond the scope of the Fed’s mandate.

Toomey and Shelby are not likely to derail the effort to evolve Fed policy but their misgivings may be shared by investors who would prefer for the Fed to keep its eye on the ball.

Fed Watch: Policymakers Wake Up To Inflation Threat, But Is It Too Late?
 

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Fed Watch: Policymakers Wake Up To Inflation Threat, But Is It Too Late?

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Comments (13)
Ron Koenig
Ron Koenig Jan 19, 2022 1:24AM ET
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Time for shorting the indexes big time????
Rob Fordham
Rob Fordham Jan 17, 2022 1:00PM ET
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Oh no sky is falling every article is the sky is falling mist comments are the same. History shows truth is in the middle. We have inflation for the first time in a long time after coming out of a workdwide pandemic that shut down eveything and we are still recovering from yet somehow its all the Feds fault. Talk about judging from the cheap seats. Everyone needs to take a beat and realiZe the fed is changing as data changes chill
Shane Zhang
Shane Zhang Jan 17, 2022 12:18PM ET
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Yes too late USD is in the verge of major downtrend.  In 2008 personal debt cause major crash in stock.  But this time is the government debt it will cause USD to crash.  One thing is guaranteed is that every macro theme we will have something different in the financial market.
Rob Fordham
Rob Fordham Jan 17, 2022 12:18PM ET
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So u must be shorting thr dollar or st least the marketnif its “gurantees” right?
Shane Zhang
Shane Zhang Jan 17, 2022 12:18PM ET
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Rob Fordham  No I am shorting USD.   In fact I am bear on most paper currency.  But I do hold hard asset such as real estate.
Pvt Zadov
Pvt Zadov Jan 17, 2022 8:32AM ET
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Actually, if the Fed will raise rates after all it might cause deflation, making the "transitory" status of inflation fully reasonable. But deflation is even worse, so the Fed is in the stalemate.
Vincent Rudi
Vincent Rudi Jan 17, 2022 8:21AM ET
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If the fed would of hiked 1/2 point a year it would have been much better than the knee jerk reactions.....they obviously can not see past there noses when it comes to our economy, management/ oversite in this country is in a sad state. clearly not qualified for there positions
Rob Fordham
Rob Fordham Jan 17, 2022 8:21AM ET
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Yea cuase hiking a 1/2 point a year in the last 2.5 years made sense i mean its not like we had a global pandemic that shut down the world economy during that time. So that makes perfect sense (not)
Vincent Rudi
Vincent Rudi Jan 17, 2022 8:21AM ET
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You should join the fed board.
Aisah Manogangcar
Aisah Manogangcar Jan 17, 2022 8:20AM ET
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Nick Burns
Nick Burns Jan 17, 2022 8:13AM ET
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what's the worst case scenario ...ok now think that will not be the case cause we all arent going to die so just as inflation as been part of the markets boom and bust cycles it will happen again. it's on each and everyone and each and every business to prepare for the worst and hope for the best .. you can cry and point the blame all you want but as long as you've taken care of yours you know your outcome... now imagine if everyone was responsible enough to do that lol ... anyhow all these worries of doom and gloom isn't a repeat of 2007 the economy is not falling apart we are just talking about paying more for some things ... you know the same thing we always do and get over Everytime it happens ... yes things are going to change they always do and no one likes it ... but once it's reset you load the bus like you did last time and gain your advantage just like last time ... everyone talking about economics 101 should also know it's a constant cycle so cry but we'll get through it
whoady son
whoady son Jan 17, 2022 7:58AM ET
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that is why the markets are still going up. Nobody takes the Fed serious. They always try and kick the can down the road.
Peter ONeill
Peter ONeill Jan 17, 2022 7:58AM ET
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No market is still climbing as the Fed has printed Trillions in QE which has increased the money supply in circulation by $4 Trillion (all of this money trying to find a home) + interest rates are still at 0% - 0.25% which means a lot are still borrowing to invest with limited risk. Many are also investing in US equity markets despite it being overvalued as cash savings are being burnt by high inflation plus US bond levels are still very low. Many of the main investment banks are now advising clients to invest overseas / emerging markets to hide from inflation versus overvalued US equity markets as inflation and interest rates collide.
Samkelo Thalente
Samkelo Thalente Jan 17, 2022 7:55AM ET
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Hency Sunuwar
Hency Sunuwar Jan 17, 2022 7:52AM ET
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Ashluxe Micheal
Ashluxe Micheal Jan 17, 2022 7:52AM ET
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Where making use from!?
 
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